Its Technology Helps Consumer Products Stay Small And Cool

• Marilyn Alva
• On 7:27 pm EDT, Thursday October 8, 2009

As electronics products get smaller, business for Tessera Technologies gets bigger.

San Jose, Calif.-based Tessera plays a key role in the miniaturization of electronics.

Its core chip packaging technology enables portable devices such as laptops and mobile phones to pack more silicon inside. So even as devices shrink, functionality increases.

"We grow based on the amount of computing power designed into consumer products like PCs and smart phones," said Tessera's chief executive Hank Nothhaft.

The more silicon per device, the more revenue opportunities for Tessera.

"When you make electronics smaller or thinner, it creates a need for smaller packaging," Nothhaft said.

A semiconductor package is the protective interface between a chip and the system in which it operates.

Tessera gets upfront licensing fees and a royalty stream after certain sales hurdles are met.

"What's great about Tessera is that it's a unit-driven play," said analyst Christopher Muse of Barclays Capital. "They have fixed pricing on units."

No Pricing Pressure

So the firm is not affected too much by pricing pressures. It makes the equivalent of just a few pennies per chip on its packaging, but volume is key. Nothhaft figures 32 million memory chips have shipped on its packages over its nearly 20-year history.

The number of memory chips is expected to double over the next five years, Nothhaft notes.

"Everyone is using our technology," he said. "We invented it."

Customers who've licensed Tessera's technology include a who's who roster of chip and electronics firms, such as Intel , Samsung and Toshiba, to name a few.

But not everyone who uses packaging technology has paid Tessera licensing and royalty fees. Tessera has been working aggressively the last couple of years to get users to pay up through patent-infringement litigation.

"Legitimate licensees expect us to enforce our IP (intellectual property)," Nothhaft said. "It's a cost of doing business."

The company's legal fees have been running about $5 million a quarter. Revenue is expected to hit $310 million this year, up from $248 million last year.

Tessera scored a major wireless-case win in late May, resulting in Motorola turning into a full licensee.

But wireless technology supplier Qualcomm and a few other defendants in that case are appealing the ruling from the U.S. International Trade Commission. Qualcomm has gotten around paying Tessera licensing fees for packaging in North America by switching to Tessera's major licensee, Amkor Technology . Earlier this year, Amkor agreed to pay Tessera about $64 million to settle arbitration.

In another still-open case, against PC memory companies, Tessera is appealing a part of a recent decision from the ITC that its patents, though valid, were not infringed.

In the wireless market, Tessera has a 45% market share in its core packaging business, Muse says. That means up to 55% of the market could be infringing on its intellectual property.

"It's a double-edged sword," Muse said of the lawsuits. "You want (defendants) to pay, but you also don't want litigation expenses to kill earnings power today."

Legal issues makes some watchers uncomfortable.

"If Qualcomm fights hard for three years and wins," Muse said, "does Samsung (and other licensees) try to do the same thing (by not paying)? I don't think they will, but it makes it hard to value the core business now."

Those unknowns make it important that Tessera do well in its emerging second line of business in imaging and optics, analysts say. Nothhaft has made the new business a chief priority since he took over as CEO in August 2008 amid a tough year that saw profit fall almost 90%.

Nothhaft has been called a "serial entrepreneur," helping build start-ups such as Concentric Networks, DSC Communications and GTE Telenet Communications (now Sprint). He was CEO of mobile Internet company Danger Inc. until it was acquired by Microsoft in early 2008 for $500 million.

This year, Tessera is expected to earn $1.49 a share vs. 10 cents last year, according to Thomson Reuters. Analysts estimate a slight dip in 2010 to $1.37 a share before rising to $1.84 in 2011.

Management is aiming for $100 million in imaging and optics sales by 2011, up from an estimated $30 million this year.

"For Tessera to grow, it's made a big bet on the optics side," said Raymond James analyst Hans Mosesmann.

And longer term, its new silent air "ionic" cooling technology could provide meaningful growth as notebooks get thinner. Muse sees revenue ramping to at least $50 million in 2011 for the new cooling technology, which reduces heat build-up in PCs in a quieter way than fans and with less power consumed.

In optics and imaging, Tessera is initially targeting the camera handset market. That's an addressable market of 1.7 billion units by 2011, Barclays Capital estimates.

Gartner estimates that cameras should increase their penetration of the handset market from 69% in 2008 to 82% in 2010.

Tessera offers technology around the hardware and software of camera modules. It's meant to lower costs and improve image quality.

In mid-September, Tessera raised its third-quarter revenue guidance for its imaging and optics business to $7 million, from $6 million in early August. Third-quarter revenue guidance for its much bigger micro-electronics business was raised about $10 million from earlier to at least $65 million.

Array Of Products

In addition to handset cameras, the company is looking at Web cams and gaming consoles. Other applications might eventually include low-cost cameras embedded in toys, auto-navigation systems and TVs.

Barclays' Muse estimates the imaging and optics business could kick in 65 cents a share in earnings in 2011. Since it uses existing infrastructure, margins will be at least 70%, he says.

But until there's more visibility into orders and fees, Mosesmann says it's too soon to tell whether Tessera can meet that $100 million sales goal in 2011.

Tessera has announced several licensees for its smart optics and imaging technology, including Samsung, Toshiba and Fujitsu.

Customers for other products in the new division include Japanese manufacturer Alps Electric, packaging houses Xintec in Taiwan and China Wafer Level CSP in China. Omnivision (NasdaqGS:OVTI - News) uses Tessera's image sensor packaging. Other customers are Q Tech in China and Moroccan start-up Nemotek.

Buzz up!